By Diana Flier, compliance expert, Intuit UK

With a target of £7bn in additional tax to bring in every year between our current financial year and 2014/15, HM Revenue and Customs (HMRC) is set to up the ante on tax evasion and collections. One of the tactics to be used to help meet this target is unannounced compliance visits on small businesses. In anticipation of this new initiative, Diana Flier from Intuit explains why preparation and good book-keeping are key.

According to HMRC, more than two million small business owners could be keeping inadequate records, which in turn typically lead to an underassessment and payment of tax. As a result, HMRC recently started compliance spot checks on the SME sector to ensure record-keeping is in line with tax requirements. The initiative is expected to see some 50,000 small businesses visited and those whose records do not meet minimum standards could face the threat of fines of up to £3,000.

To begin with, HMRC will be trialling a new single compliance process — which will cover enquiries across a range of different taxes — within 10 locations across the UK. The trial will run for six months, before being rolled out county-wide, subject to the trial results.

While some may say that HMRC is being heavy-handed, record-keeping is in fact crucial to business success as poor record-keeping is one of the top five reasons why small businesses fail. Alongside the threat of fines, it is therefore paramount small business owners are pro-active in getting their books in order.

What do small businesses need to do?

To quote HMRC guidance, “You must keep records of all your business transaction.”

As it stands, all businesses must file a tax return with HMRC and these returns can take many forms including Corporation Tax Returns and Self Assessments. As part of a tax return a business will need to report a multitude of figures such as income, business expenses and disallowable expenses. The returns are used to tell HMRC how profitable a business has been and in turn the amount of tax that needs to be paid. If HMRC has any queries with the tax return, they can ask to see all the associated records and documentation, including all issued and received invoices and receipts.

In line with its refreshed approach, HMRC has dictated that sole traders and partnerships with a turnover of less than £15 million are no longer required to submit their accounts along with their tax return, as all the required information will be captured in the ‘Standard Accounts Information’ (SAI) part of the return. This is by no means a ‘get out’ clause as these businesses will still need to produce these accounts should an investigation by HMRC be launched.

What types of records do small businesses need to keep?
This will vary depending on the type of small business, if it has employees and also whether it is VAT registered.

While there are a number of online resources (such as Business Link) available to support small businesses on the specific types of records it should keep, a quick check list should include:

A cash book

A petty cash book

A sales and purchase ledger

A wages book

Invoices and receipts both issued and received

Electronic records of sales or till rolls

Details of items not rung through the till

Details of incidental or miscellaneous income - for example rent for accommodation owned by the business

Hire purchase and leasing details

An inventory of stock on hand at the end of the accounting year

Bank and building society statements, pass books, cheque stubs and paying-in slips which include details of business transactions

Details of any money taken out of the business personal use

Details of any private money brought into or taken from the business

It is worth noting that if HMRC finds that a small business has not kept all the required records, or if they have not been keeping records for long enough, they could find themselves facing a fine.

Don’t delay it any longer

While book-keeping typically falls pretty low down on a small business owner’s agenda, it is worth noting that it is more than just a legal requirement; it can also make or break a business. Getting into and maintaining good book-keeping habits are crucial to both passing an HMRC spot check and running a successful business.

Best practice in record-keeping means setting aside some dedicated time each week to review and update the books. While spreadsheets and paper notes may work for some small business owners, it is not the most effective way to work. Increasingly, small business owners are turning to financial management software to help with their record-keeping as this helps them track their expenses in real-time and manage cash flow. This means that should the HMRC come to their door, they are not left wading through a pile of paperwork and can quickly be accountable for their record-keeping. So make sure you are prepared too!